China sprouts green shoots in securitization

When asking bankers in Asia-Pacific (Apac) about securitization, the response has often been a disinterested shrug. 

The rise of securitized products in markets such as the US and Europe was, for various reasons, never replicated on a large scale in Apac. This simply wasn’t something that was understood or wanted in the region… or so they said.

As 2014 unfolded, there were signs that even the most hardened of the naysayers was thinking again. And as with many things in Apac, it was China that was starting to change things.

“Before the global financial crisis, Asian securitization only saw pockets of activity, such as Singaporean Reits and Korean banks issuing cross-border ABS,” explains Kyson Ho, head of structured finance, Apac, HSBC.

“At the time, they were mainly selling to offshore investors. Then came the crisis and liquidity tightened up. The securitization market in Asia never really had a strong regional investor base as it just wasn’t big enough to grab people’s interest. But what has changed is the growth of China’s onshore securitization market.”

He adds: “Since 2012, local regulators and players have started to look into how these products would work in practice under the reopened market. Before 2014, there were mainly domestic offerings by banks. Since 2014, the Chinese government has allowed certain Chinese subsidiaries of foreign entities to issue securitized products.”

These changes by the Chinese authorities appear to have had a number of effects on the fledgling securitization market, boosting the amount of business done in the space in a fairly short period.

“As a result, we went from having very little issuance to having seven deals between May and the start of December, especially in the automobile space,” continues Ho. “These offerings have brought in international investors and international structures. 

“Before, these products were structured to meet domestic standards. Now, some have international ratings. Interest from international investors has risen because the products are linked to international names.”

Automobile market

An example of a deal that HSBC worked on last year was an RMB799 million auto ABS from Volkswagen Finance. HSBC acted as financial advisor and sub-underwriter. The closing date was August 1, 2014.

“The limits on deal amounts in China have been lifted, so expect some larger deals next year,” adds Ho. “There will probably be some deals in the first quarter. 

“Also, China has simplified the issuing process. In terms of securitization, the automobile market will be the big one for next year. You will also see activity from Chinese subsidiaries of foreign banks. I see the market growing by around 2.5-times next year.”

Other bankers agree the automobile market is one of the primary drivers of the growth in securitization within China, and could be the catalyst for further business in 2015.

“There is a growing need for auto financing from consumers in China,” says a senior banker based in Hong Kong. “This is reflected in the spike in leasing-related transactions. I would not be surprised if there is more out of China in the automobile space next year.

“I’m not too sure about the legal side of things cross-border; whether the legal framework is sufficiently laid out for cross-border. Most of the stuff I’m aware of is … domestic. The local securitization market has just started. I think investors are ready to do more, but whether international issuances are going to be properly structured is uncertain.”

Although it is clear that the market is building in China, there are still those that remain unconvinced the level of sophistication exists in Asia to support the growth of securitization.

“The multiple layers of financial infrastructure I don’t think have been built out in Asia,” says another senior Apac banker. “There’s a huge education process needed on that. It’s a specific buyer base internationally. For the investment banks, it’s considered very resource intensive with marginal returns.

“It’s sector or asset specific, not country specific. I think a lot of the European banks have been focused on that market and we are hearing that others are spending more time on it.”

The banker adds: “I know some of the domestic banks have been involved in securitization for quite a long time. There has been some on the aircraft leasing. It’s probably the domestics that will have the lion’s share of that market. 

“A US bank would have to get comfortable with the fact that some cars in China don’t have any sort of individual identification number like they do in the US.”

However, despite the obvious issues in developing the industry, the growth of securitization in China looks set to continue into 2015 and beyond. And it appears that this trend is one that might mark the end of the disinterested shrugs when the business is mentioned in the future.